A Study on Audit Committees' Oversight of Internal Control over Financial Reporting

As audit committees are expected to assess the design and implementation of internal controls, the challenge of supervising financial reporting controls has become more prominent. This article examines how audit committee members oversee internal controls for financial reporting. The article uses agency theory and institutional theory to explain the role of audit committees as corporate governance monitors. Since there is a gap in the literature on how audit committees perform their supervision of internal controls, this research aims to shed light on the process of audit committee oversight of internal control over financial reporting (ICFR) and seeks to investigate the factors that influence the variation in audit committee internal control over financial reporting oversight.

The study collected the required data from 97 audit committee members of companies listed on the Tehran Stock Exchange. These members serve on the largest audit committee within their respective companies, determined by annual income. A questionnaire was administered to audit committee members to assess the extent of their engagement in overseeing different facets of internal control over financial reporting. The evaluation was based on the 17 principles outlined in the 2013 Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control Framework. The primary questions of the questionnaire addressed 13 out of the 17 principles of the COSO internal control framework, encompassing all five components. Specifically, these questions delved into three principles within the control environment, four principles in risk assessment, two principles in control activities, as well as principles related to information and communication, and monitoring activities. The collected data was analyzed using EViews software.

The statistical analysis of the gathered data revealed that audit committee members devote the most time to monitoring activities, control activities, and risk assessment areas respectively, and the least time to control environment areas. Moreover, the regression analysis of the study showed that the industry of the companies, specifically financial services, or insurance, is positively related to the extent of overall audit committee oversight of internal control over financial reporting. Other characteristics such as age and internal audit experience do not impact the level of oversight.

This study investigated the focus and allocation of audit committee members' supervision on internal control over financial reporting (ICFR), as well as the factors influencing the variability in audit committee oversight. The achieved results indicated that most of the audit committee members of Tehran Stock Exchange companies do not have specific procedures, processes, and metrics to oversee the ICFR in the audit committees. Furthermore, audit committee members allocate the least time to the most critical component of internal controls, namely, the control environment.